A Leap From Cyber Cool to Corporate Conformity

Freewheeling Yahoo has grown up, trading youthful exuberance for the stability of profitability

SAN FRANCISCO — Henry Sohn joined Yahoo Inc. in 1996, when Nerf-gun fights were frequent and the long hours spent at the online portal constituted a labor of love.

Vast fortunes from stock options were not far off. Everyone shared a tireless dedication to enhancing the user experience, and, yes, to changing the world. At least it seemed that way.

"We were deluged with requests from companies who wanted to understand what we were doing and how we were doing it," said Sohn, Yahoo's 50th employee and now vice president of network services. "We were having an impact everywhere."

Yahoo still thinks big. But in today's depressed online market, talk about changing the world has been overtaken by a feverish dedication to something more basic--turning a profit.

Now that the new economy is not so new, Yahoo's leaders are trying to craft a sustainable business model in a business that is still making itself up as it goes along.

"In the early days, there was not a real strong need to prioritize growth," said Susan Decker, Yahoo's chief financial officer. Now services are carefully vetted for their potential to generate revenue.

"We [want] to get deeper into those users' hearts, minds and hopefully their pocketbooks," she said.

Yahoo's transformation from geek hobby to corporate conformist symbolizes the life cycle of the Internet economy. Although it has managed to eke out profits while other sites went belly up, the freewheeling Yahoo that Sohn and other early employees joined exists largely as a memory.

The company's revamped home page, launched July 1, symbolizes that shift. The changes seem subtle at first, but on close examination they are substantial: Fee-based personal ad listings, shopping and music downloads are front and center; free news and search services that form the core of the Yahoo experience for most users are pushed down the page.

The new pragmatism was inevitable.

"The Web used to be a cool, alternative media source--now the Internet is mainstream," said Patrick Keane, an Internet analyst with Jupiter Media Metrix. "We're talking about a medium that has 60% penetration of the U.S. audience. It's closer to cable [TV] every day."

And Yahoo has become more like a typical TV network.

"In the past, Yahoo was seen as this Stanford-computer-science-altruist company," Keane said. "Now they are clearly out to exploit consumers."

For investors, at least, that may be great news.

After six consecutive quarterly losses amid the carnage of the Internet advertising market, Yahoo announced a modest profit for its second quarter: $21.4 million, or 3 cents a share, contrasted with a loss of $48.5 million, or 9 cents a share, in the period a year before. Revenue rose to $225.8 million from $182.2 million.

Some wonder whether the online pioneer--despite on-again, off-again rumors that it will be acquired by a larger media company--might be finding a model for stability.

New Business Plan

That was precisely the goal when former Warner Bros. Co-Chief Executive Terry Semel was hired as Yahoo's CEO a little more than a year ago amid the steep decline of the Internet economy. He was charged with developing a new business plan for the ad-dependent site--based largely on selling services to consumers and corporations.

The company's Sunnyvale, Calif., campus, which it moved into shortly before Semel arrived, is dotted with volleyball nets, espresso bars and park-like courtyards--all purchased during the heady days when Yahoo's market value exceeded $100 billion. At its Friday closing stock price of $13.37 per share, Yahoo is worth $8 billion.

In the old days, people would work until 10 p.m., then go to an adjacent field for a pick-up soccer game to blow off steam. Those days are gone.

"It's part of growing up," Sohn said, but Nerf-gun skirmishes, such as a recent battle involving 50 engineers, still erupt on occasion.

But even as Semel tolerated Yahoo's youthful exuberance, he reined in the company's occasional excesses--such as its Christmas party. The 2000 holiday bash, at the height of the dot-com boom, featured four live bands and unlimited oysters on the half shell. Employees drank their martinis extra cold--they were poured through holes in bars carved from ice.

Last year, Semel's first at the company, layoffs hit a few days before Christmas. Many employees decided to skip the scaled-back and decidedly somber holiday affair.

Semel also curtailed the company's freewheeling tendency to finance any new project that sounded cool. And he adopted a hard-nosed approach to Yahoo's business and image:

* Last fall, a pay-for-position policy was instituted at Yahoo's search service--long touted as the company's pristine, noncommercial core and its raison d'etre as an honest broker of information. Now advertisers rise to the top of Yahoo's search results.